Nortel killing business of active management, says Young

FundMonitor research has laid out fund performance without Nortel, concluding that active managers are beating the rest of the market. “They just can’t match the huge effect Nortel has had on the Canadian indexes. Effectively the whole Canadian fund industry is short on Nortel,” Young concludes.

Nortel closed at $118.95 today, up another 3.25%, after reaching an all-time high intra-day. The stock has traded in a 52-week range of $29.80 to $119.15. Its performance has driven it to represent an ever-increasing share of the TSE 300. “Nortel was just a small piece of the index a couple of years ago, and now it’s 35%,” says Young.

Active fund managers are limited to holding 10% in any one stock, and so they’ve been prevented from loading up on Nortel when it’s been running wild. The concentration restrictions aren’t a bad thing according to Young, who says that Nortel is vastly overvalued. “A dollar of earnings from Nortel is not worth four times a dollar of earnings from the banks, it just isn’t,” he insists. “Even if Nortel is growing twice as fast as the banks, as most analysts project, it isn’t growing fast enough to justify the huge premium
it is receiving in the market.”

If Nortel drops, as Young predicts it will, the indexes will be gutted and active fund managers will be vindicated. In the meantime, Young counsels advisors to emphasise with clients, but protect them from buying high and selling low.